Toronto Has the Highest Housing Bubble Risk in the World: Report

Condo towers dot the Toronto skyline as a pedestrian makes his way through the winter landscape on Jan. 28, 2021. (Frank Gunn/The Canadian Press)

Toronto has the highest housing bubble risk among the world’s major cities, according to a new report.

The Union Bank of Switzerland’s (UBS) report [pdf] ranked Toronto at the top of its list with a “bubble index” of 2.24, followed by Frankfurt at 2.21 and Munich at 1.81.

Vancouver’s bubble index is 1.70, the sixth-highest among the 25 cities in the study.

Factors involving imbalances in the economy, such as excess lending or construction activity, are aspects that UBS considers when calculating its bubble index. The term bubble refers to the mispricing of an asset that is not proven until the bubble bursts and prices change.

UBS says price corrections have already begun or will begin for most cities in the survey within the coming quarters, due to imbalances caused by rising interest rates and high housing prices.

“Higher interest rates, inflation, turmoil in the financial markets, and deteriorating economic conditions are putting the housing boom under pressure,” the report states. Although it says this could lead to “prolonged stagnation” in house prices, this is not the most likely outcome, as real estate markets rarely stagnate. A “robust labour market” is what UBS says will be the last pillar in the collapsing market.

The UBS report points to central banks as the main driver of booming increases in housing prices, saying low financing rates and a demand for new housing that exceeds the pace of new home construction has led to increasingly optimistic price expectations among buyers in recent years.

Housing prices among some of the world’s largest cities accelerated 10 percent from mid-2021 to mid-2022, the highest increase since 2007, while the average mortgage rate has almost doubled, leading to “sky-high” imbalances in cities such as Toronto and Vancouver, according to the report.

“We are witnessing the global owner-occupied housing boom finally under pressure, and in a majority of the highly-valued cities, significant price corrections are to be expected in the coming quarters,” the report said.

With home prices in Vancouver and Toronto having tripled over the last 25 years—coinciding with falling mortgage rates and urban housing shortages amid population growth—UBS says their bubble index had been flashing warning signals for years.

“In such overheated markets, with already very stretched housing affordability, the recent rate hikes by the Bank of Canada could be the last straw that broke the camel’s back,” says the UBS report.

Royal LePage Forecasts Price Drop

Royal LePage’s latest forecast says that the average house price in Canada, $774,900, has increased by 3.3 percent since last year. However, comparing this quarter to the previous one, there has been a 4.9 percent decrease.

They predict that the fourth quarter will see another decrease of 0.5 percent.

“Our revised outlook has national prices at just below where we ended 2021, erasing the gains made in the first quarter of 2022,” said Phil Soper, president and CEO of Royal LePage, in the forecast report.

The average home price in the Greater Toronto Area (GTA) increased 2.1 percent from last year to $1,098,100 but decreased by 5.9 percent since last quarter, according to Royal LePage. It predicts another 3.5 percent decrease in the fourth quarter.

“Some investors are looking to take advantage of lower sticker prices, while many first-time buyers have put their purchase plans on hold for the time being, which has caused a surge in rental demand and sent rental prices skyrocketing over the last several months,” Karen Yolevski, chief operating officer at Royal LePage, said of the GTA market.

“Potential buyers who have secured a mortgage rate are eager to transact before it expires, and ahead of another potential interest rate hike,” Yolevski noted, predicting a “moderate boost in demand” for the fall.